Euro edges higher ahead of ECB decision

The euro ticked higher on Thursday, signalling muted investor concern that European Central Bank chief Mario Draghi will attempt to talk the currency down when he speaks later in the day.

Ahead of the ECB decision, the euro climbed 0.37 per cent on the dollar to $1.1959, not far below the recent highs of $1.2069, according to Reuters data. The common currency was also higher against the pound, rising 0.2 per cent to £0.9149.

Investors are expected to look for any clues as to whether Mr Draghi and other policymakers are concerned about the euro’s rise this year. The currency has rallied about 6 per cent on a trade-weighted basis, with the dollar having performed particularly poorly. The concern among some economists is that a strong euro will place pressure on exports and slow the pick-up in the bloc’s economic output and weigh on price growth.

David Kohl, a currencies strategist with Julius Baer, notes that any downward revision to the ECB’s inflation forecast may be another way of revealing “the impact of the stronger euro on the eurozone economy.”

However, Michael Sneyd of BNP Paribas said that since the ECB already pointed to concern over “a future overshooting of the exchange rate” at its July meeting, he does not “expect Draghi to aggressively talk down the euro.” After all, he adds, the trade-weighted euro is only up around 2 per cent since July (see chart above).

Any word on the ECB’s plans to begin unwinding its bond buying programme will also be closely scrutinised. “We expect the European Central Bank to prepare the ground for an announcement in October that it will reduce its pace of asset purchases,” said Mr Sneyd.

The ECB decision is set to be published at 12:45 London time, with Mr Draghi’s news conference to follow 45 minutes later.

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